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1 Tax Planning International European Tax Service January 31, 2014 UK son of FATCA and recent information exchange proposals A fast-developing theme in international tax during 2013 has been the automatic exchange of tax information between jurisdictions. A number of new programmes in this area were announced during the course of the year and we expect further developments in This article charts what has happened so far and how the authors expect things to develop in 2014 and beyond. Charles Yorke and David Stainer Allen & Overy LLP, London Charles Yorke is a Tax Partner and David Stainer is a Senior Professional Support Lawyer at Allen & Overy LLP, London. I. Background FATCA: the information exchange lid is lifted It is difficult to avoid the conclusion that it is the US Foreign Account Tax Compliance Act ( FATCA ) which has opened the eyes of jurisdictions all over the world to the potential benefits of information exchange. Much of the focus of the international tax community has been, at least until FATCA intergovernmental agreements ( IGAs ) started to be signed, on the withholding tax aspects of FATCA. However, it should not be forgotten that FATCA's purpose is to enable the US Internal Revenue Service ( IRS ) to obtain information on financial accounts held by US citizens outside the US. FATCA withholding was always a rather draconian stick to encourage financial institutions to provide that information. The UK was the first jurisdiction to sign a FATCA IGA with the US, in September 2012, and since then almost 20 other jurisdictions have done likewise. The network of IGAs enables the US IRS to obtain the information that it requires, either from the tax authorities in IGA counterparty jurisdictions (in the case of Model 1 IGAs) or directly from financial institutions in IGA counterparty jurisdictions (in the case of Model 2 IGAs). And of course, financial institutions in those jurisdictions which have not signed an IGA will be required to enter into an agreement to provide the required information to the US IRS, unless they want to be withheld against on payments to them. The overall result for the US will therefore be a flow of information to it on financial accounts held by US citizens outside the US, which should make it a good deal more difficult for US citizens to avoid US tax by holding their investments outside the US. Unsurprisingly, other jurisdictions have looked with interest at that end result, and the result has been what some commentators have called a ripple effect, as various new programmes and initiatives promoting information exchange have been announced. II. Son of FATCA : the UK gets in on the act 1/5

2 As mentioned above, the UK was the first jurisdiction to sign a FATCA IGA with the US and it has been especially proactive in its involvement with information exchange since then. Just over a year ago, as part of the 2012 Autumn Statement, the UK announced that it would use the US-UK FATCA IGA as a model for broadly similar agreements to be entered into between the UK and its three Crown Dependencies ( CDs ) the Isle of Man, Guernsey and Jersey and seven Overseas Territories ( OTs ) the Cayman Islands, the British Virgin Islands ( BVI ), Bermuda, Anguilla, Turks and Caicos Islands, Montserrat and Gibraltar. This programme came to be known colloquially as son of FATCA. The aim was to enable the UK to collect information on UK resident taxpayers with financial accounts in CDs or OTs and to limit the potential for UK residents to avoid UK tax by keeping money offshore in CDs or OTs. Unlike FATCA, no threat of a withholding tax was needed to encourage the CDs and OTs to sign up to son of FATCA ; rather, it appears that the UK had sufficient political power over its overseas possessions to encourage them to sign up in any case. Following on from the Autumn Statement announcement, a discussion document was published by HMRC in June 2013, along with a model agreement to form the basis for bilateral agreements between the UK and each CD/OT. In October and November 2013, all but one of the agreements with the CDs/OTs was signed. October 2013 saw the signing of tax information exchange agreements ( TIEAs ) under son of FATCA with the three CDs. Each of these TIEAs was reciprocal, in that it provided both for the UK to receive information from the counterparty CD, but also for the reverse to apply, with the UK providing information to the CD. In November 2013, TIEAs were signed with all but one of the OTs, the exception being Anguilla. Importantly, only one of the OT TIEAs was reciprocal in the same way as the CD TIEAs: that with Gibraltar. The other TIEAs those with the Cayman Islands, the BVI, Bermuda, Turks and Caicos Islands, and Montserrat are one-way only, in favour of the UK. That is to say, none of these TIEAs place any obligations on the UK to transmit information to the OT counterparty. It was announced in January 2014 that Anguilla has amended an existing TIEA with the UK, and entered into an additional agreement, to provide for automatic information exchange under son of FATCA. It is worth noting that the TIEA with Bermuda is, unlike the others, a Model 2 TIEA (using FATCA IGA terminology) that is, it provides for reporting directly by Bermudian financial institutions rather than by the Bermudian tax authorities. The fact that four of the TIEAs are reciprocal gives rise to the need for domestic UK regulations empowering HMRC to collect the information it needs to pass to the CDs and to Gibraltar from UK financial institutions. The International Tax Compliance (Crown Dependencies The general framework of the UK son of and Gibraltar) Regulations 2014 (the UK son of FATCA Regulations) were published in draft by HMRC on FATCA Regulations is similar to that of December 12, 2013, along with a response document, the UK FATCA Regulations and a short further consultation period was opened until January 24. The UK son of FATCA Regulations are to be introduced under the same regulation-making power in Finance Act 2013 which was used to bring in the International Tax Compliance (United States of America) Regulations 2013 (SI 2013/1962) (the UK FATCA Regulations), the domestic rules which empower HMRC to collect the information it is required to pass to the US IRS under the FATCA IGA. The general framework of the UK son of FATCA Regulations is similar to that of the UK FATCA Regulations, although there are some differences. Reassuringly, HMRC appears to understand that it will be desirable for the scope of reporting requirements applying under son of FATCA to match (as closely as possible) those applying under the UK FATCA Regulations. This will minimise the amount of extra work UK financial institutions need to undertake beyond that which they would already have had to do for FATCA purposes. Notwithstanding that general point, some of the key differences are as follows. The UK FATCA Regulations provide for two broad types of reporting obligation - one in respect of certain kinds of financial account, and the other in respect of certain types of payment to financial institutions not 2/5

3 participating in FATCA (i.e. financial institutions not located in an IGA jurisdiction and which have not entered into a FATCA agreement with the IRS). The UK son of FATCA Regulations, by contrast, provide only for the former type of obligation. This is because the payments reporting requirement in the UK FATCA Regulations is intended to be analogous to the passthru withholding requirement that forms part of the US FATCA rules, so is not relevant to son of FATCA. The date for first reporting under the UK son of FATCA Regulations is one year later than that which applies for the purposes of FATCA. Barring any unexpected further slippages in the timetable, first reporting under FATCA will be in 2015, with first reporting under son of FATCA being in 2016 in relation to financial accounts in existence on or after June 30, (It should be noted, though, that some financial institutions have indicated a preference to report under both regimes in 2015, which HMRC is considering.) The UK FATCA Regulations cross-refer in a number of places to the UK-US FATCA IGA, and even in some places to the underlying US FATCA regulations. In the FATCA context, this means that all of those sources, along with HMRC's guidance on the UK FATCA Regulations, potentially need to be consulted when considering on a UK FATCA reporting question. HMRC initially intended that, where possible, the UK son of FATCA Regulations would cross-refer to the underlying US FATCA regulations, with the aim of maximising consistency between FATCA and son of FATCA. Consultation feedback has persuaded HMRC this was a bad idea, and that the UK son of FATCA Regulations should (with the relevant TIEA) stand alone to the extent possible. Accordingly, cross-references to the US FATCA regulations have been removed from the UK son of FATCA Regulations where possible. There are other differences in points of detail which are beyond the scope of this article. The aim is for the UK son of FATCA Regulations to be finalised and enacted by the end of the first quarter of 2014, so as to allow UK financial institutions sufficient time to build and test their reporting systems and processes before first reporting in III. The G5/OECD pilot programme: information exchange goes truly global Launching son of FATCA is not the only way in which the UK has been a front-runner in the global information exchange movement. In April 2013, the UK joined forces with the Governments of France, Germany, Italy and Spain the so-called Western European G5 to launch a pilot project for automatic information exchange. The idea was for the five nations to exchange a wide range of financial information automatically with one another, once again with the target of detecting tax evasion. The proposal has developed rapidly since the original The UK FATCA Regulations cross-refer announcement, both in terms of the number of jurisdictions involved and in terms of who is running the in a number of places to the UK-US project. In June 2013, at the G8 meeting at Lough Erne, FATCA IGA Northern Ireland, the Organisation for Economic Cooperation and Development ( OECD ) presented a report to the leaders of the attending nations on how to deliver an effective system for automatic exchange of information in a multilateral context. In due course this led, in July 2013, to the G20 Finance Ministers endorsing a single new global standard for automatic exchange of tax information, and mandating the OECD to undertake the technical work needed to take this forward. The aim of such a common reporting standard is laudable: to prevent the development of numerous competing standards for information exchange, and in so doing to minimise potential costs and administrative burden for the financial sector. It is understood from HMRC that the G5 pilot programme announced last April should be regarded as one and the same with the OECD work on a common reporting standard, with the technical work being undertaken by the OECD stemming from the political drive provided originally by the G5 Governments. Over 30 jurisdictions have now signed up to the OECD project, although this figure is increased somewhat by including the UK's three CDs and ten OTs. It also includes a number of other EU Member States and various non-eu jurisdictions including Australia and Norway. We expect to see this project develop significantly during The current proposed timetable is as follows: A draft model for a common reporting standard is due to be finalised and published during February It is understood that, unlike as regards FATCA or son of FATCA, the OECD reporting would be put 3/5

4 in place via competent authority agreements between tax authorities, rather than by the signing of a bilateral treaty such as an IGA or TIEA. This may be under the authority of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (the document which the OECD prepared for the G8 in June 2013 suggests that Convention could be used in this way). Competent authority agreements would be likely to be more appealing to Governments than negotiating full bilateral agreements, one imagines. Where the OECD is concerned, the key detail is often in the accompanying commentary, which in this case is due to be finalised and published by the late summer of It is understood that the current aim is for first reporting under the OECD proposals to be in relation to Much will turn on the detail of the OECD proposals. While the original G5 proposal was billed as being based on FATCA IGAs, will that remain the case or will the OECD choose to take a different approach? How will differences of approach between jurisdictions on points of detail be dealt with in a common reporting model? Will the OECD work supplant son of FATCA, or maybe even FATCA itself? All this remains to be seen. IV. Directive on Administrative Co-operation: the EU has its say With information exchange being such a hot topic, it is not surprising to see the EU getting involved. As is well known, the EU Savings Directive (2003/48/EC) ( EUSD ) has for more than ten years now provided for a regime for the reporting of savings interest between EU Member States. Proposals to amend the EUSD to widen its scope and lessen the potential for it to be circumvented were first proposed by the European Commission back in They have been held up since then because one or two EU Member States object to them (unanimity would be needed to make the changes), and whether they will ever be implemented is not much clearer now than it was five years ago. In June 2013, the European Commission announced proposals to widen a different EU Directive significantly, the Directive on Administrative Co-operation (2011/16/EU) ( DAC ). The DAC was introduced in 2011 to replace an earlier directive from 1977 which had become outdated. The 2011 DAC introduces automatic information exchange from January 1, 2015 for five categories of income and capital, including employment income, certain life insurance products, pensions, and income from immoveable property. The proposal is for information exchange under the DAC to be widened to include dividends, capital gains, income arising from assets held in a financial account, amounts with respect to which a financial institution is obligor or debtor, and account balances. Notably, it is proposed to drop the provision of the DAC which limits exchange to available information, on the grounds that member states will already be making information available to the US under FATCA IGAs, and the DAC contains a most favoured nation clause preventing member states from co-operating more favourably with non-member States (e.g. the US) than member states. There is a general question as to whether those member states who have objected to the proposals to widen the EUSD would be willing to agree to a much wider DAC. Even if any objections were overcome and the DAC were to be widened, it is as yet unclear how the changes would fit in with the OECD programme. V. Exchange of tax clearances: the role of the OECD's BEPS project Finally, it is worth noting that several of the measures which form part of the OECD's work on base erosion and profit shifting ( BEPS ), first proposed in a report in February 2013, and supplemented by a BEPS action plan released in July 2013, have some relevance to this area. One such proposal is to require exchange between tax authorities of tax rulings given by a preferential regime if taken forward this could give tax authorities a much higher degree of understanding about how corporate activities in their jurisdictions interact with preferential rulings a group may have obtained from a no or low-tax jurisdiction elsewhere. It is also worth noting that the BEPS action plan contains some proposals on country-by-country reporting this is one of just a number of proposals in this area, which are outside the scope of this article. VI. Conclusion: information exchange is here to stay To conclude, information exchange is a hot topic at the moment and that situation is likely only to increase in Along with the commencement of FATCA, the key events of this year are likely to be the release of the OECD's common reporting standard and associated commentary. At the moment little information is available on what these proposals will look like, and the financial sector will be very interested to see what the OECD 4/5

5 will come up with, and the extent to which it differs from FATCA and son of FATCA. For More Information Charles is a partner in Allen & Overy's London tax group. Charles has a broad practice, including mergers and acquisitions, capital markets transactions, derivatives, securitisations, group reorganisations and project finance. He may be contacted by at David is a senior professional support lawyer in Allen & Overy's London tax group, specialising in the corporate tax aspects of financing transactions. He may be contacted by at 5/5

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